There wouldn't be many who think Northeast Securities Co., Ltd.'s (SZSE:000686) price-to-earnings (or "P/E") ratio of 31.4x is worth a mention when the median P/E in China is similar at about 35x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Northeast Securities' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Northeast Securities

How Is Northeast Securities' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Northeast Securities' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 53% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 44% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Northeast Securities' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Northeast Securities' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Northeast Securities revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Northeast Securities that you should be aware of.

If these risks are making you reconsider your opinion on Northeast Securities, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.